2016-1
IP Bits
The Hard Issues in a Field License - Part 1 

Unfinished

Field licenses can be extremely difficult to negotiate. Some of the negotiation challenges arise because of the law that impacts upon a field license. Some of them arise because of the tensions that will always occur between an exclusive field licensee, that seeks and expects all the rights typically to be found in an exclusive license, and a licensor which retains rights outside the field, and therefore seeks to retain some of the rights that ordinarily would have been granted to an exclusive licensee.

The hard issues are complex, so this edition of IP Bits will focus on one issue only, and the next issue will focus on the remaining issues.


A field licensee cannot prosecute infringers

An exclusive licensee granted rights in a field will expect to be able to prosecute an infringer of the licensed IP. A licensee protecting its exclusive rights by prosecuting infringers is a core right that all exclusive licensees pay for, and expect.

But a licensee that is exclusively licensed in a field does not have this right. The patent legislation of most countries treats an exclusive field license as a non-exclusive license, not an exclusive one. The patent legislation of most countries also prescribes that a non-exclusive licensee does not have the legal standing or capacity to prosecute infringers.

Friction between the licensor and the licensee now emerges. The field licensee will want to be conferred the power to prosecute infringers in the licensee’s field, as would typically happen in an exclusive license without a field restriction.

But a licensor however will be concerned about that in relation to a field licensee, in ways that would not arise if the licensee had exclusive rights without a field restriction.

Many, or even most infringers, respond to infringement proceedings by attacking the validity of the patent that it is alleged they infringe. In an exclusive license without a field restriction, the exclusive licensee can usually be relied upon to make decisions in relation to both the infringement proceedings and the validity proceedings, in a manner that promoted the interests of both the licensor and the licensee. The interests of both are aligned.

But that is not necessarily the case in a field license, where their interests are not necessarily aligned. In validity proceedings an exclusive field licensee may make decisions having regard to those claims in the patent that relate to its field. The licensor will naturally be concerned that decisions might be made impacting adversely upon claims outside the field, that is, the applications and fields which the licensor has retained.

The matter cannot be solved as easily as stating that the licensee will not make decisions impacting upon claims outside the field without the licensor’s consent. The licensee may not recognise that a decision it is making might impact upon the licensor’s retained rights. 

A licensor could propose the reverse: that the licensor will control the infringement and validity proceedings, and will not take action impacting upon the licensee’s field without the licensee’s consent. All that is achieved however is a standoff: the licensor and field licensee each want to be in control of the proceedings, to protect each’s own interests. It is always possible that a licensee may make decisions that are prejudicial to the licensor. And it is also possible that the licensor may make decisions that are prejudicial to the licensee.

The matter is even more complicated for the licensor. The field retained by the licensor may not be for the licensor’s exploitation, but rather the licensor may seek to license out the retained field.

Allowing the first field licensee to control infringement proceedings in the licensee’s field, and as a result, also control validity proceedings, may be so unacceptable to the second field licensee that it deters the second field licensee, and puts at risk the licensor’s ability to grant a second exclusive license in a second field.

The problem can be easier to solve when negotiating two field licenses concurrently to two different but experienced licensees. There would be a three way negotiation involving the licensor as well as both field licensees, and they are both motivated to explore commercial solutions.

The problem is hardest to solve when there is only the prospect of a second field license, involving as it does the licensor in the uncertainty of what the second field licensee’s requirements will be.

There is no single compelling model to resort to for assistance in solving the dilemma. So often, the matter will depend upon the relative bargaining strengths and weaknesses of the licensor and licensee.

Some of the things to consider include:

1.         Licensor joined in infringement proceedings

A licensor may be joined in infringement proceedings, as it is the only person with standing to bring the proceedings. This may involve the licensor being exposed to potentially significant legal expenses. The licensor would typically seek an indemnity from the field licensee against any liabilities that the licensor may incur as a result of being joined in the proceedings. In relation to a field licensee that is impecunious, the licensor might also seek security for that indemnity. The license might require these as a precondition to infringement proceedings being commenced.

7.         The comparative value of the rights licensed in the field and the rights retained outside the field
This is a critical factor. The greater the value of the licensed rights in a field, and the corresponding lower the value of the IP rights retained by the licensor outside the field, the more that a licensee will want to have the ability to maintain infringement proceedings, and the harder a licensor will find it to negotiate a different outcome.

The opposite is true as well. The greater the value of the rights retained by the licensor outside the field, and correspondingly the lower the value of the rights granted in the field to the licensee, the more confidently the licensor can seek to retain the right to prosecute infringers.

8.         There may never be a second field licensee
As much as a licensor granting an exclusive field license may aim for and seek a second exclusive licensee in another field, or even a third exclusive licensee in a third field, etc, the reality is that a second field licensee may be elusive, and it may just never eventuate. This reality, the first field limited licensee will argue, justifies it having all the rights to maintain infringement proceedings. This may suggest a possible way forward to resolve the dilemma, and that is to confer upon the field limited exclusive licensee the power to maintain proceedings against an infringer, with that lasting only for as long as that first licensee is the only licensee, and that right ceasing upon the grant of a second exclusive license in a second field.

These issues never arise in an exclusive license without a field restriction. The exclusive licensee has standing to maintain infringement proceedings, without the assistance of the licensor.


2.         Split the responsibility

A model that can sometimes work is to split the responsibility in the proceedings, with the exclusive field licensee taking responsibility to prosecute infringers, and the licensor having the responsibility to control any validity proceedings.

1.         The suspension of royalties

A typical term in a non-exclusive license is that the licensor will prosecute infringers, and that if the licensor fails to do so after having been provided sufficient evidence of the infringement, the non-exclusive licensee’s royalty obligations are suspended. After all, if the licensor’s inaction enables an infringer to infringe without the obligation of a royalty overhead, why should the non-exclusive licensee be burdened by the royalty overhead, and as a result be less competitive. The non-exclusive licensee will want to enjoy the same privilege of having no royalty obligation that the infringer enjoys.

This model can also be used where the licensor retains the power to prosecute infringers in a field license. It is a compromise model, since of course the exclusive field licensee would prefer not to have royalties suspended, but would rather pay them, and be equipped to take infringement proceedings and thereby put a stop to the infringer’s activities.

2.         Up front license fees

This suspension of royalties model does not work so well for a field licensee that pays an up front license fee as the only consideration for the license, and pays no royalties for the term of the license. If the field licensee has paid all the consideration for the license as a lump sum, it will indeed be prejudiced if the licensor retains the right to prosecute infringers, and fails or refuses to do so, having the result that the field licensee is less competitive against an infringer that cannot be stopped, and does not have the overhead of having paid for the right to use the IP, which needs to be recouped.

3.         Power of attorney

A field licensee, being treated as a non-exclusive licensee, and therefore lacking standing and capacity to prosecute an infringer may seek a power of attorney from the licensor to confer this right.

The result of a power of attorney is that the licensee attorney has the power to sue in the licensor principal’s name, and thereby to create legal obligations and liabilities upon the licensor, which the licensor, having granted the power of attorney, may not be in a position to control or influence. The prospect of the licensor being liable for the actions of the licensee attorney will not be an appealing one for the licensor, which may be disinclined to confer a power of attorney.

That will especially be so where the licensor is a university, research organisation, or Government laboratory. The prospect of equipping a person to create liabilities and obligations upon the risk averse public body will indeed be daunting, and avoided.



6.         Cost

The cost of the proceedings has to be taken into account. A licensor may be a university, research organisation, or Government laboratory, and it will not normally want, nor be sanctioned to commit to what is the very substantial and prohibitive cost of funding infringement and validity litigation. In fact, this type of licensor relies upon a licensee with deep pockets to fund the cost of infringement and validity litigation.


Concluding comments.

Field licenses are special licenses, with special and unique issues which do not always have straightforward solutions. So many of the outcomes on these special issues will depend upon the relative bargaining strengths and weaknesses of the respective parties in their negotiation. Like all the other issues in a negotiation, the best prepared party with a mastery of the issues, will be likely to achieve the better outcome.